Unaccountable ECB creates a genuine democratic deficit in EU

ANALYSIS: Ireland will gain from the checks and balances of the fiscal treaty – it’s a democratic deficit in the EU that’s worrying

ANY COMMITMENT, no matter how deep or long-term, requires re-evaluation from time to time. Ireland’s commitment to European integration is one such. The commitment is long-standing and shared by an overwhelming majority of people and sectional interests in Irish society who have seriously weighed up the costs and benefits of being involved in Europe against those of going it alone.

In the interest of transparency, I have always shared the majority view, believing the European construct was good for Europe and a model of interstate co-operation that the rest of an increasingly interconnected world could well emulate.

For Ireland, the dynamic effects of liberalisation alone have been huge – both on international and elements of domestic trade. The benefits have been greater still when one adds the boost to foreign direct investment (as a result of being part of the European space), large capital transfers and farming subsidies.

The non-economic benefits have been as important. They include the security of the European legal order (for small countries, rules-based systems level the playing field by constraining the freedom or larger countries to exercise their greater power) and the impact of a proactive EU level of governance (most environmental protection legislation, for instance, comes from Europe and much of it would likely never have been enacted by the inert domestic political system).

The costs of EU participation (until recently) have been next to nonexistent, as illustrated by the freedom to do things that caused considerable resentment among some other member countries, including fostering a large offshore financial centre and using corporation tax as a means of attracting investment.

Indeed, so great have been the benefits of EU participation and so few the costs that such a happy situation was always too good to last. That is what appears to have happened amid the tectonic shifts in Europe in recent years.

This week marks the second anniversary of European leaders abandoning the euro zone’s “no bailout” clause after it became clear Greece was in imminent danger of defaulting on its sovereign debt. In the intervening two years, the EU has been embroiled in the most serious crisis since the project’s launch in the 1950s. The crisis is existential. Far too little has been done to address it meaningfully. That includes the fiscal compact, which was agreed at the beginning of last week and is designed to reduce mismanagement of public finances in the euro zone.

Discussion of the fiscal compact has hugely overstated the implications for Irish sovereignty and greatly understated the risks associated with the existential crisis it is designed to address.

Together with domestic budgetary rules and frameworks being put in place, the compact adds to the checks and balances against mismanagement introduced last year at EU level. Given that Ireland has suffered two separate fiscal disasters in a single generation, having more checks and balances of any kind is something to be welcomed, not worried about.

But if the recent tinkering with budget rules does not have major consequence, the next logical step in dealing with the euro crisis – the issuing of common bonds – throws up more profound questions. But even posing them is difficult given that Europe is still some distance from agreeing to such a step.

The questions include: what are the implications for outstanding national debt of introducing euro bonds, particularly the outstanding debt of weaker countries; what would the relationship be between the agency and member states in distributing money raised; and to what accountability mechanisms would the agency be subject?

If European leaders are some distance from agreeing common debt issuance, they are even further from creating a true fiscal union – involving a much bigger central EU budget that would approximate in size those of other fiscal/monetary unions.

If, as is the case in many other monetary/fiscal unions, harmonisation of tax rates were not to be part of the package then I do not believe fiscal union is a threat to Irish interests. If the choice is between participating in such a fiscal union or allowing the euro to break apart, integration over fragmentation is the infinitely preferable option.

While the fiscal path ahead is not cause for great concern, the emergence of the EU’s first real democratic deficit is very much so. Various groupings have often levelled this accusation at the EU in the past, but without much foundation in fact. Power in the EU has been subject to even more checks and balances than in its member states; as the institutions compete, the states do the same and they all watch each other like hawks.

The European Central Bank is a case apart. During a crisis nobody foresaw, the ECB has been forced to take actions nobody envisaged. Its lack of accountability, flowing from it having been made the most independent central bank in the world and the enshrining of that independence in constitutional law, has only recently become clear.

That has manifested itself in the almost blasé way it decided Ireland (and Portugal) should be placed in bailout programmes, its insistence that Irish taxpayers should bear the losses of senior bank bondholders, its failure to explain its rationale for so doing and the dismissive tone and impatient demeanour some of its officials have sometimes adopted when asked perfectly legitimate questions about its stance on the issue.

Until the financial crisis erupted, monetary policy was not a contested issue. It was widely believed central bankers had delivered on their price stability mandate. As a result, monetary policy had become a largely technocratic function. That is one reason why the ECB’s almost complete lack of accountability went unremarked before the crisis.

During the crisis it has remained underdiscussed, perhaps because the immediate has the tendency to push seemingly less urgent issues down the agenda.

If and when the current turmoil is resolved, this democratic deficit must be addressed. If it is not, it will permanently alter the cost/benefit calculus of European involvement.